Aurum’s quarterly review – Q2 2021

Risk assets advanced over the quarter, supported by the continued roll-out of COVID-19 vaccinations across the world and significant re-opening from most major economies. The debate as to whether inflation is transitory or more structural rumbled on. Markets were reminded towards the end of the quarter that the actions of the US Federal Reserve (and other central banks), are still a significant driver of asset prices.

Multi-strategy funds drove performance in most portfolios for the quarter. Equity market neutral trading teams generated solid performance trading through Q1 earnings season and navigated the ongoing rotations from growth to value and back to growth over the quarter. It was pleasing to see healthy returns across a number of sectors with technology, financials and healthcare all contributing. The retail investor-driven short squeeze that made headlines in January, returned to the market periodically, although managers have become increasingly aware of this risk and exposure to crowded names has been notably reduced. Elsewhere, merger arbitrage, index rebalancing, commodity trading and credit relative value strategies also contributed to the strategy’s positive results.

Systematic strategies were largely positive. Commodity trading strategies had a particularly noteworthy quarter as oil and natural gas prices advanced strongly. In equities, short-term statistical arbitrage and machine learning strategies were positive as volatility remained elevated despite ticking down towards the end of the quarter, while longer-term strategies were challenged by ongoing factor rotations.

Event driven strategies were positive over the quarter. A notable deal in the semi-conductor industry was a strong contributor of returns over the quarter, overcoming a number of regulatory hurdles to near completion, although approval from Chinese authorities is still pending. Deal flow remains healthy, although spreads widened towards the end of the quarter as a high-profile deal in the insurance sector was blocked by the US Department of Justice. Index rebalancing trading was also profitable despite the large factor rotation impacting positioning.

The second quarter was negative for macro strategies. A hawkish pivot from the Federal Reserve in June led to an unwinding of the reflation trade as US government bond yields declined to their lowest level since March, while the yield curve notably flattened. Discretionary macro strategies were largely caught wrong-footed with losses stemming from short USD, long commodity, long gold and curve steepening positions. It is important to note, however, that discretionary macro strategies have historically proved invaluable in protecting capital in more turbulent months and were strong contributors in 2020 and remain a core component of the Aurum portfolios.

Aurum’s underlying equity long/short funds were positive over the quarter. Asia-focused managers were the primary drivers of returns with gains in consumer discretionary and technology sectors. Rotations between growth and value challenged positioning for US and Europe focused funds, however, performance was positive overall with long positions in consumer cyclical and industrial sectors outperforming.

While it remains to be seen whether or not inflation will persist, a great deal of time is spent to ensure that the Aurum portfolios are nimble and able to capitalise on many different possible outcomes that may lie ahead. Investing in managers with a trading mind-set, allowed the portfolios to build on the strong start to the year and should ensure that they are well-placed to navigate markets for the remainder of the year and beyond.